- Stocks suffered their worst year since the financial crisis, as volatility spiked in the fourth quarter.
- Most major asset categories finished 2018 in the red.
- Cash outperformed most of the world’s major stock indexes.
- Corporate profits, trade, and interest rates are the factors to watch in 2019.
- If the current economic expansion extends to the summer, it will become the longest on record.
- Investors should focus on high-quality assets and maintain a diversified portfolio.
Data Source: FactSet
Starting out with more of the same in 2019
The challenges that tripped up U.S. markets late in 2018 continue to be the most significant stumbling blocks as we enter 2019. Decelerating economic growth, trade disputes, tariffs, and interest rate concerns all pose headwinds for investors in the new year. Stocks are coming off their worst performance since the financial crisis (2008) and finished in negative territory for the first time since 2015. However, this has made U.S. stocks more attractively valued, in our view. That said, we see a range of possible scenarios that could challenge markets in 2019. Considering the current environment, investors should remain flexible to changing circumstances and expect volatility to continue.
Markets are focused on three key areas
1. U.S. Earnings
The combination of rising interest rates, stable, but modestly reduced global demand and the fading effects of corporate tax reform could lead to a downshift in corporate earnings this year. We expect that unfavorable comparisons to the previous year’s results, inflation pressures, and tariffs could sap momentum from sales and earnings trends.
Analysts cut their 2019 earnings per share (EPS) estimates for more than half the companies in the S&P 500 during December 2018, according to the financial data firm FactSet. This marks the largest number of estimated EPS cuts in two years. We believe investors are now pricing in a rather flat earnings growth environment for this year, which has added to recent selling pressure in the stock market.
However, we believe full-year profits for S&P 500® Index companies could grow by mid-single digits and just slightly below the Index’s long-term average. If companies can meet this objective, we believe stock prices could trend higher since current valuations look more attractive.
It is difficult to anticipate all the direct and indirect effects that U.S./China trade tensions could exert on economic and corporate fundamentals in 2019. We believe slower-than-expected manufacturing activity last month in both countries, along with declining asset prices, reflect growing trade frictions.
Improved relations between the U.S. and China could give markets a lift, but further deterioration seems just as likely and could turn markets negative again. Currently, the U.S. and China remain far apart in resolving their disagreements, and investors will want to see progress on this front before stocks are likely to meaningfully move higher from here.
3. Interest Rates
The Federal Reserve could hike the fed funds rate two times this year, exerting continued pressure on yields and fixed income investments. Nevertheless, slowing global economic growth and recent Fed comments indicting that further rate hikes may be limited have quickly changed investors views on the rate environment for this year.
As of this writing, fed fund futures are assuming a high probability that the Fed will end 2019 with rates at or below current levels. This is a dramatic turn of events compared to November last year, when futures trading priced in a 90% probability that rates would be higher at the end of 2019.
In our view, the Fed’s policy path remains difficult to predict given the uncertainties of trade negotiations. However, investors’ changing attitudes about what they expect from monetary policymakers this year certainly reflect the negative sentiment of recent weeks.
What does all this mean for your portfolio?
Given the current environment and themes discussed above, investors should ensure their portfolios are focused on high-quality assets. We believe trade tensions and interest rates are the largest threats to global economic momentum and markets this year. If these threats are resolved positively, asset prices will be well positioned to move higher. Yet, if both factors continue to challenge markets, asset prices could see a difficult road ahead. Investors should ensure their allocations are consistent with their longer-term risk profile. A disciplined portfolio approach, led by forward-looking guidance starts with taking proactive steps today to prepare for the uncertainty of tomorrow.
Be sure to talk to your Ameriprise advisor to discuss your current portfolio mix and determine if any changes are needed to help you continue to make progress toward your goals.
Data source: Morningstar Direct
As of Jan. 9, 2019